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Ricardian Equivalence - YouTube
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good afternoon everyone we are students
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from school of economics EMU Thailand
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today we would like to talk about the
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Ricardian equivalence first please turn
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on the phone to silent mode thank you so
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what is the Ricardian equivalence it is
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how do the consumers respond to the
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fiscal policy it can be described by two
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theory Cain and Fisher in Cain assume
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that people who are borrowing
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constraints then they are focusing on
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their current income not their future
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income for Fisher he looks into two
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periods of time the current period and
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the future period so if people consume
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too much in current period people will
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consume less in future period now let's
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look at the government debt it is the
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debt owned by the central government
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that being affected by the spending and
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receipts so is the government debt
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really a problem consider a tax cut with
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corresponding increase in the government
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debt we have two viewpoints the
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traditional view and the Ricardian view
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first
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let's look at the traditional view when
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government cuts tax consumers respond to
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their extra disposable income people are
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now short-sighted the current
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consumption depends on the current
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income next is the Ricardian view was
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opened by David Ricardo which has been
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advanced by Robert barro according to
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the Ricardian view the tax cuts has no
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effect on consumption national saving or
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real GDP even in the short run as the
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consumers are forward-looking know that
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a tax cuts today means an increase in
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future taxes so the tax cuts doesn't
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make the consumers better off causing
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private saving to rise in the same
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amount of the falling public saving
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leaving the national saving unchanged
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now what seems to be the problems for
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this view
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first is myopia some consumers do not
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think far ahead
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next is the borrowing constraints some
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consumers cannot borrow enough to
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achieve their optimal consumption so
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they have to spend a tax cuts lastly is
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the future generations they may expect
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the burden of repaying a tax cut to fall
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in the future now are there any evidence
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against the Ricardian equivalence in
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early 1980s President Reagan implied the
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tax cuts policy it increased deficit
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national saving fell real interest rate
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rose and exchange rate appreciated in
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1992 income tax withholding reduced to
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stimulate the economy half of consumers
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increased consumption but is it fair to
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judge the Ricardian view from Reagan
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consumers may expect to pay the debt by
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cutting on future spending instead and
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private saving may have fallen for other
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reasons than tax cut such as the
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optimism about the economy another
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interesting case is the Bush tax cuts
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since 2001 saying - cuts effectively
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paid for themselves Wall Street Journal
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and Heritage Foundation were supporting
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the cuts stated that taxes paid by
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millionaire households more than double
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the statements have been disputed by
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many organizations policy analysts and
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economists including Paul Krugman wrote
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in The New York Times 2007 supply-side
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doctrine which claimed without evidence
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never got any traction in the world of
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professional economics research the
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policies were claimed for the rise in
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income inequality critics have stated
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that the tax cuts increased the budget
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deficit it shifted tax burden from the
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rich to the middle and working classes
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the fall Bush tax
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were the single biggest contributor to
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the deficit over the past decade
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reducing revenues by about 1.8 trillion
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u.s. dollar lastly is the payroll tax
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cut 2011 in Washington by reduced
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workers Social Security tax withholding
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rate from six point two percent to four
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point two percent for a family earning
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less than fifty thousand US dollar a
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year this is the result of the survey it
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shows that people consume more than
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their plan and save less than their
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expectation by the way the data is
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object to different interpretations
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there is no black and white in this case
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now ask yourselves two questions what
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view do you agree and why do you agree
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with the view this is exhausted isn't it
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it's time for some sit back and relax
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thank you for your attention and have a
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happy Monday
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